A story that never gets old

Commenter slocum at CT:

The reason tax rates aren’t higher and bankers are getting bailed out on hugely generous terms isn’t because Rawlsians have outvoted Cohenites behind the veil of ignorance, or even because lots of economists believe the Laffer hypothesis. It’s because the rich and powerful are, well, rich and powerful.

No. Tax rates aren’t higher because of the widespread belief among U.S. voters that high tax rates are harmful to economic growth. In places and eras where those beliefs were less prevalent, tax rates are higher (despite the fact that those eras and places also have their own rich and powerful). That charges of ‘class warfare’ and ‘the politics of envy’ are effective is a result of those general beliefs. In other places and eras, class struggle was seen as a positive by enough voters, for it to be a vote-getter rather than the reverse.

As for the bailouts—does Brad Delong’s clear support for the latest Geitner bailout plan indicate he’s one of the self-serving rich and powerful (or is being paid to serve their interests, or suffers from false consciousness)? Or is it possible that the main motivation for the bailouts comes from the fact that those in charge are scared shitless (justifiably or not) about the potential for general collapse if the banks are not bailed out?

Lastly, what all y’all Rawls fans will never seem to grasp is the declining returns of high income in an increasingly wealthy society. Because of that, the lives of the rich and poor have been converging (pretty dramatically) in material ways—gini indexes notwithstanding. In the 19th century, the lower classes were physically smaller because they were malnourished. 40 years ago when I was a kid, the middle classes had clotheslines instead of dryers, black and white TVs, window fans instead of air-conditioning, rarely ate in restaurants, and most had never traveled on an airplane. Living in bog standard suburbia not rural Appalachia, I knew kids whose families who always drank powdered milk rather than fresh to economize.

But what kinds of material possessions do the wealthy in the U.S. now have that the lower classes do not? It’s hard to come up with much—yes, the rich have fancier versions and more prestigious brands, but that’s mostly it. Despite the name, Sub Zero refrigerators don’t keep your beer any colder. Material differences in living conditions have been reduced pretty dramatically even as nominal dollar inequality has grown, and they’ve been reduced by increasing societal wealth overall, not redistribution.

On the other hand, I have some relatives about my who live on wages that are, say, 1 1/2 to 2x minimum wage. You could double their wages, and they couldn’t live my lifestyle, whereas you could cut my wages to their level and I could (and did so for many years as grad student). In my late 40s, I enjoy the same vigorous activities I did in my 20s, and those cost very little (hiking, backpacking, biking, canoeing). Pandora, Project Gutenberg, and my $8.99 NetFlix subscription keep me well supplied with entertainment. They, on the other hand, are overweight smokers, don’t eat well, get little exercise, and so are developing the typical chronic health problems —the years have taken much more of a toll. They’re also not good at deferred gratification, tend to be impulsive shoppers, and so always have credit card debt problems. You get the picture. In other words, those differences that remain—and they’re not trivial—are not ones that could be readily ameliorated by transfer payments. Most of the difference that matter would persist. As societies get wealthier, it is increasingly the case that the quality of your life depends on who you are rather than how much money you have—what would Rawls say about that?

Now, you might say—well, if you don’t really need as much money as you make, then we should raise taxes on higher earners and redistribute the proceeds. But the problem is that because higher incomes bring diminishing returns, higher tax rates will have more of a discouragement effect than they would otherwise. Even at my existing marginal rates of ~50% (when you figure fed, FICA, state and local), more leisure looks pretty attractive. So I’d argue that the poor are better off if you keep marginal rates low enough that the wealthy keep working hard rather than kicking back and relaxing more. But if increasing tax rates make it more normal for people like me to demand additional leisure rather than additional income, that would be OK, too. Societally, I think it would be a mistake, but for me personally it’d really be OK —I can adapt.

2 thoughts on “A story that never gets old”

  1. Or that I think that the Geithner Plan is (a) a reasonable way to spend $100B of TARP money that will (b) probably turn some profits for the government, and (c) diminish the peak unemployment number by 500,000 or so?

  2. Yeah, professor, sorry about that. I’m positive you’re motivated in your opinions about the plan by more than utter financial collapse. I thought about yanking that section of the quote out because I haven’t been following your views on the matter and I didn’t want to endorse views of your opinions one way or the other. It turns out I was too lazy.

    I did think it was funny to imagine “Brad Delong” — unabashed “reality based” commentator — suffering from false consciousness.

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